Ch. 12 Finance

1. As new capital budgeting projects arise, we must estimate A. the float costs for financing the project.B. when such projects will require cash flows.C. the cost of the loan for the specific project.D. the cost of the stock being sold for the specific project. B
2. This is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements. A. incremental cash flowsB. cash flow analysisC. pro forma analysisD. substitutionary analysis C
3. If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a A. committed costB. complementary costC. obligated costD. sunk cost D
4. Effects that arise from a new product or service that increase sales of the firm’s existing products or services are referred to as A. complementary effects.B. substitutionary effects.C. sunk effects.D. marginal effects. A
5. Effects that arise from a new product or service that decrease sales of the firm’s existing products or services are referred to as A. complementary effects.B. substitutionary effects.C. sunk effects.D. marginal effects. B
6. Concerning incremental project cash flow, this is a cost one would never count as an expense of the project. A. initial investmentB. taxes paidC. operating expenses of the projectD. financing costs D
7. This is used as a measure of the total amount of available cash flow from a project. A. free cash flowB. operating cash flowC. investment in operating capitalD. sunk cash flow A
8. Which of the following is NOT included when calculating the depreciable basis for real property? A. freight charges for itemB. sales tax paid for itemC. financing feesD. installation and testing fees C
9. When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following? A. EBIT – Interest – Taxes + DepreciationB. EBIT – TaxesC. EBIT + DepreciationD. EBIT – Taxes + Depreciation D
10. This is the concept that a unit’s sales will follow an approximate bell-shaped curve versus a steady sales life. A. bell curve cycleB. coefficient of variationC. product life cycleD. NWC life cycle C
11. A decrease in net working capital (NWC) is treated as a A. cash inflowB. cash outflowC. sunk costD. historical cost A
12. This is the IRS convention that requires that all property placed in service during a given period is assumed to be placed in service at the midpoint of that period. A. mid-point conventionB. mid-month conventionC. mid-quarter conventionD. half-year convention D
13. Accelerated depreciation allows firms to A. receive less of the dollars of depreciation earlier in the asset’s life.B. receive more of the dollars of depreciation earlier in the asset’s life.C. not pay any taxes during an asset’s life.D. receive more of the dollars of depreciation later in the asset’s life. B
14. Section 179 allows a business, with certain restrictions, to do which of the following? A. Offset the tax liability with the cost of the asset in the year of purchase.B. Expense the asset immediately in the year of purchase.C. Expense the asset using double declining balance depreciation during the life of the asset.D. Get a government grant to purchase the asset. B
15. For which situation below would one need to “smooth out” the variation in each set of cash flows so that each becomes a perpetuity? A. choosing between projects with differing risksB. choosing between independent projectC. choosing between alternative assets with differing livesD. choosing between alternative assets with equal lives C
16. The best approach to convert an infinite series of asset purchases into a perpetuity is known as the A. Net working capital approachB. Net present value approachC. Equivalent annual cost approachD. Equivalent annual cash flow approach C
17. One way to account for flotation costs of raising capital is to A. adjust all the project’s cash flows so that each year it will reflect the flotation costs.B. adjust the project’s initial cash flow so that it will reflect the flotation costs.C. adjust only the project’s operating cash flows to account for paying back the shareholders.D. adjust the project’s tax burden to account for the tax implications of raising capital. B
18. With regard to depreciation, the time value of money concept tells us that A. delaying the depreciation expense is always better.B. taking the depreciation expense sooner is always better.C. delaying the depreciation expense is sometimes better.D. taking the depreciation expense sooner is sometimes better. B
19. When looking at these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life. A. incrementalB. replacementC. cost-cuttingD. new B

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